Injury Victims Should Not Be Penalized for Purchasing Insurance

By Allen, Flatt, Ballidis & Leslie

In the state of California, insurance companies and other advocates for tort reform have a long history of lobbying for restrictions on victim’s rights. A recently proposed Senate bill, however, would change a Supreme Court decision to provide broader recovery for plaintiffs, explains a personal injury attorney in the state.

California’s Tort Damages Rule

In the state of California, tort reform efforts have successfully limited the amount that plaintiffs can recover in certain civil actions. For instance, under California law, there is a $250,000 limit on non-economic damages in medical malpractice cases. Recently, the Supreme Court in Howell v. Hamilton Meats imposed even further limitations on the damages that an injured plaintiff can recover. This time the restrictions affect more than just medical malpractice claims.

In Howell, the plaintiff suffered injuries with medical bills totaling $200,000. However, the insurance company who paid the bills ended up negotiating rates and terms and only paid $60,000 in total for the $200,000 in medical bills.

The trial court in Howell determined that only the $60,000 that was actually paid out should be awarded to the plaintiff for personal injury damages. The appellate court reviewing the case disagreed and determined that the full $200,000 in actual medical costs incurred should be paid, and the case was sent to the Supreme Court for a final decision to be made.

The Supreme Court’s decision was a major boon to insurance companies, as the court held that damages for medical costs would be limited to actual monies paid out. This meant that in Howell and in subsequent future cases, the plaintiff would be limited to recovering only for whatever the insurance company paid out. Since insurance companies are notorious for paying only pennies-on-the-dollar of what the actual costs of medical care would otherwise be for someone uninsured, this ruling seriously curtailed potential damages for plaintiffs.

In response to the ruling, Darrell Steinberg, a California senator, introduced Senate Bill 1528. Under the rule set forth in Senate Bill 1528, all injured parties would be entitled to recover the reasonable value of medical services provided, regardless of how much was actually paid out. The summary of the bill indicates that this requirement should be in place for public policy reasons, as it ensures that all victims are compensated equally, rather than those with insurance being more limited in what they can recover due to the reduced payments made possible by virtue of the fact that an insurance company is paying the bills.

Opponents of the Bill, including insurance companies, suggest that the rule proposed would significantly increase the cost of insurance premiums. If the Howell rule is overturned, these insurers indicate that they would need to pay out an additional $3 billion per year in higher insurance rates.

The reality, however, is that the Howell rule is the rule that changed the law in the first place. For more than a century, a collateral source rule has applied to ensure that all plaintiffs are compensated for the reasonable value of their medical treatment, regardless of whether they paid for private insurance or not. The collateral source rule is in place so that those with the foresight to purchase private insurance are not, in effect, penalized for making that decision and paying premiums.

The collateral source rule was the standard for so long because incentives to purchase private insurance were maintained with the rule in place. In fact, in her dissent in the Howell fact, Justice Klein quoted from a 1970 California Court decision explaining the importance of the collateral source rule: “The collateral source rule expresses a policy judgment in favor of encouraging citizens to purchase and maintain insurance for personal injuries and for other eventualities…If we were to permit a tortfeasor to mitigate damages with payments from plaintiff’s insurance, plaintiff would be in a position inferior to that of having bought no insurance, because his payment of premiums would have earned no benefit.”

When the Howell court determined that a plaintiff would receive only what was paid by the insurance company, essentially this was penalizing the individual for purchasing private insurance. Without having purchased that insurance, which allowed for the reduction in medical costs, the plaintiff would have received more recovery in the personal injury action. Because the plaintiff’s recovery was now being reduced due to the private insurance (albeit indirectly in this case), the plaintiff was not receiving any benefit from the years of paying for premiums. Instead, the insurance companies who were paying out less in damages in the personal injury action were effectively receiving the benefit of the injured plaintiff’s premium payments.

With its new rule, therefore, Howell was effectively rewriting longstanding California law and changing policy. The proposed Senate Bill 1528 will simply change this pro-business decision and once again give California plaintiffs the right to recover for the reasonable value of medical bills, ensuring that these plaintiffs are the ones who benefit from their purchase of insurance.

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